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Gold Price Forecast: Major Bearish Technical Reversal - Levels for XAU/USD

Gold Price Forecast: Major Bearish Technical Reversal - Levels for XAU/USD

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Gold Price Outlook:

  • Gold prices have been obliterated this week as Fed rate hikes have surged around commentary from Fed Chair Powell and incoming Fed Vice Chair Brainard.
  • A return back to the uptrend from the August 2021 and September 2021 swing lows near 1770 is in focus in the short-term before support comes into play.
  • According to the IG Client Sentiment Index, gold prices now have a bearish bias in the near-term.
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Scuffed Up by Rising Rates

It’s been a rough week for gold prices, triggered by US President Joe Biden’s nominations of Fed Chair Jerome Powell to a second term and Fed Governor Lael Brainard to Vice Chair. Both Fed policymakers used their remarks on Monday to underscore their focus on reducing inflation pressures, provoking a sharp escalation in Fed rate hike odds, nominal US Treasury yields, and a drop in US breakeven inflation rates – forward-looking market expectations of price pressures.

The net-result has been a dramatic surge in US real yields. If gold prices had been benefiting in recent weeks from the drop in US real yields to all-time lows, then bullion just had its most potent catalyst torn asunder.

True, US inflation rates are expected to stay elevated over the coming months, which may cushion gold prices from a significant fall; but the Fed’s renewed focus on combating inflation vis-à-vis a faster tapering schedule and potential hiking rates sooner than anticipated may duly prevent a significant rally by gold prices henceforth.

Correlations Deteriorate Between Gold Volatility and Gold Prices

Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – gold tends to benefit during periods of higher volatility. This may not be one of those times, however.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2020 to November 2021) (Chart 1)

Gold volatility (as measured by the Cboe’s gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) was trading at 16.57 at the time this report was written. The relationship between gold prices and gold volatility has eroded in recent days as the uptick in volatility has been marked by a sharp decline in gold prices. The 5-day correlation between GVZ and gold prices is -0.33 while the 20-day correlation is +0.56. One week ago, on November 16, the 5-day correlation was +0.67 and the 20-day correlation was +0.75.

Gold Price Rate Technical Analysis: Daily Chart (May 2020 to November 2021) (Chart 2)

Gold prices were flagging last week, but failed to live up to their bullish potential. It was previously noted that “a move through Tuesday’s high of 1877.14 would signal the continuation of the bullish breakout move back towards the August high at 1916.62.” 1877.14 was never overtaken, and what soon followed was an absolute gutting of gold prices.

Instead, a significant bearish technical reversal has transpired, throwing out any previous technical inclinations of a sustained rally. In falling back below a trifecta of key levels around 1835 – the descending trendline from the August 2020 (all-time high) and June 2021 swing highs, inverse head and shoulders neckline at the summer swing highs, and the ascending trendline from the May 2019, March 2020, and March 2021 lows – a deeper setback may have just begun.

A return back to the uptrend from the August 2021 and September 2021 swing lows near 1770 is in focus in the short-term before support comes into play.

Gold Price Technical Analysis: Weekly Chart (October 2015 to November 2021) (Chart 3)

It’s been previously noted that “the 1835 level may soon be broken warranting a shift in the longer-term outlook from neutral to bullish.” Alas, gold prices have fallen back below 1835, suggesting that a false bullish breakout transpired. It may be the case that gold prices, now back within their triangle in place since June 2020, are due to trade lower in a choppy fashion for the foreseeable future.

Gold prices’ technical structure on the weekly timeframe has eroded quickly. Gold prices are now below the weekly 4-, 13-, and 26-EMA envelope, which is in neither bearish nor bullish sequential order. Weekly MACD’s climb through its signal line has been halted, while weekly Slow Stochastics are dropping from overbought territory for the first time this month.

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Gold: Retail trader data shows 74.67% of traders are net-long with the ratio of traders long to short at 2.95 to 1. The number of traders net-long is 14.98% higher than yesterday and 12.49% higher from last week, while the number of traders net-short is 4.08% higher than yesterday and 18.59% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.

--- Written by Christopher Vecchio, CFA, Senior Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.